Caps and closures are growing faster than the broader packaging and plastics markets — the segment has seen 6½ percent annual growth over the last 15 years, and growth is even higher in emerging markets, Farkas said.

He cited several reasons for the caps and closures boom:

* Packaging that was traditionally made of glass or metal, like condiment bottles and baby-food jars, is now increasingly made of plastic; 80 percent of caps and closures are plastic, up from about 50 percent in 1990.

* Packaging industry trends have been favorable to the closures market. Packagers have focused on higher-value-added, more-expensive closures that boost consumer safety, user convenience and shelf appeal. The popularity of single-serve packaging in both the food and personal-care markets has also driven growth: Switching from a 12-ounce container to a 3-ounce one drives volume.

* Macroeconomic trends, such as a growing population, and the emerging middle class and subsequent adoption of Western-style consumption habits in emerging markets like China and India, have also driven growth.

* Value drivers of the caps and closures segment are consistent with those in the overall packaging market. They include product differentiation; a focus on technology, research and development; the ability to pass through raw material costs easily; being able to offer secondary services; and focusing on attractive end markets that tend to be stable and non-cyclical.

As the industry has grown over the last couple years, private equity has taken on an important role, Weil said.

“2009 was a terrible year for the M&A market. Everyone was in panic mode for most of the year. Banks were recapitalizing; no one knew where the next shoe was doing to drop,” he said. “There are fits and starts for everything, but since 2010 the M&A market has been strong.”

In 2009, the height of the economic storm, a deal had to be pristine to get any kind of financing, he said. Since then, access to debt has improved dramatically, as banks improved, recapitalized and came under pressure to put capital to work, he said.

He added that two conclusions could be drawn from the banks’ actions: Either they have faith in where the economy is going or they’re making the same mistakes they did in 2006 and 2007. Only time will tell.

Private equity funds are also looking for a home — about $425 billion in private equity capital is waiting to be deployed, Weil said.

That really equates to over a trillion dollars in buying power for private equity firms, he said.

Private equity inventory is also up — as of June, there were more than 6,000 private equity-backed companies, compared with about 2,200 in 2004.

About 4,000 of those companies have been held by private equity firms for more than three years, so divestitures could increase in the next few months as firms start to exit, he said.

“A lot of these firms are trying to return cash, are trying to raise new funds,” he said. “Between now and the end of the year, that’s going to be a pretty important trend and a lot of activity.”

A combination of available credit, private equity cash and funds pent-up on strategic buyers’ balance sheets has made for a good M&A environment, Farkas said.

In 2012, caps and closures activity has been weighted toward strategic buyers — about 80 percent of deals were strategically motivated, he said.

The 20 percent of financially motivated deals, those completed by a financial buyer without a previous platform company, was higher than the percentage of deals in the overall packaging market (14 percent) and the middle market (10 percent), showing that the caps and closures segment is attractive and lends itself to financial buyers, he said.

Strategic activity is being motivated by a desire for accelerated growth. The industry is also seeing less “consolidation for consolidation’s sake” and the majority of transactions have targeted emerging markets or focused on acquiring new technologies and products, he said.

The strategic-buyer landscape is “generally a handful of folks that have been serial acquirers, have been industry consolidators,” he said.

Deals from buyers outside of the caps and containers world are more rare, he added.

He cited AptarGroup Inc.’s July purchase of Stelmi Group as an example of a successful strategic deal. The acquisition gave Aptar access to new injectable drug technology and entry into that portion of the pharmaceutical industry.

Crystal Lake, Ill.-based Aptar has been one of the most prolific acquirers, making 10 purchases related to caps and closures since 1997, according to Farkas’ presentation.

Since 2011, about one-third of M&A targets have been in emerging markets, compared with only 11 percent since 1997. Farkas attributes the rise to the strong potential for growth in those markets, compared with relatively anemic growth in North America and Europe, he said.

While making deals in those emerging markets is still difficult, it is becoming easier as sellers become more financially sophisticated and investment bankers expand their coverage in those geographies, he added.

Farkas cited two successful emerging-market deals completed by Guala Closures Group of Alessandria, Italy — its June acquisition of MCG Industries’ aluminum caps division in Cape Town, South Africa, and its February purchase of Anthony Smith Australasia Pty. Ltd. of Regency Park, which gave Guala access to both southern Australia and New Zealand.

On average, caps and closures multiples are historically higher than the broader packaging industry, Farkas said, at 7.9 times earnings before interest, taxes, depreciation and amortization, compared with 6.8 times EBITDA for packaging as a whole, he said.

He cautioned that multiples can be “tricky.”

“I can tell you that multiples are very specific to a specific business and there are a host of different factors that can drive multiples,” he said. “We’ve seen great companies trade for low multiples and crummy companies trade for good multiples.”

Even so, there are several factors that drive multiples in a transaction, including: a company’s historical and projected growth, cash flow and earnings sustainability; the size and scale of a business; the business’s geographic scope and reach; end-market exposure; product differentiation; and the quality of the management team, Farkas said. Also, a tight selling process will return a higher multiple than a “loose and sloppy” one, he said.

“Driving competition is what we, as investment bankers, like to do and I’ve found that’s the biggest driver of value ultimately,” Farkas said. Running a process that feels organized, with tight deadlines and an on-point management team, gives the appearance of competition, whether competition exists or not, he explained.

Deals in 2011 and 2012 have shown higher multiples and display the strength of the market, Weil said.

He cited, anecdotally, specialty packaging deals that garnered a lot of interest from both strategic and financial buyers.

In April, a health-care packaging company sold to a private equity firm at 10 times adjusted EBITDA, a rare example of an above-market multiple, he said. That example reflects the healthy private equity environment.

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